An Investigation on Lead-Lag Relationships of Price Movements between Covered Warrants and their Underlying Securities: The Application of the Threshold VECM

Abstract

The purpose of this study is to explore the lead and lag relationship between the covered warrants and their underlying stocks to determine whether there exists a spot price discovery function of the Taiwanese covered warrants for domestic financial markets. To circumvent the problem of the nonlinear temporal relationship between the prices of the covered warrants and their corresponding underlying stocks, we propose to employ the threshold vector error correction model (TVECM) to analyze their temporal relationships. The empirical evidences indicate that the price of Taiwanese covered warrants for domestic financial market can be taken as a tool for price discovery